Turkey’s face saving rate hike

The Turkish Central Bank has announced a dramatic increase in the interest rates at its unscheduled policy meeting late Tuesday (28 January) in an attempt to bolster the sliding value of its currency amidst continuing turmoil in the emerging markets. The overnight lending rate was raised by more than half to 12% from 7.75% and the overnight borrowing rate along with one-week repo rate were more than doubled to 8% and 10% from 3.5% and 4.5% respectively. Such an aggressive move has enabled the lira to strengthen to 2.18 per dollar from 2.25 late on Tuesday and after hitting its lowest point of 2.39 earlier on Monday.

The Turkish lira has been among a number of emerging market currencies that have been tumbling against the US dollar mainly because of the global effect of a tapering in U.S. Federal Reserve’s monetary stimulus as well as concerns about slowdown in the growth in China’s economy. However, in the previous two months, Turkey’s currency had lost approximately 14% of its value as it has been hit stronger than most because of ongoing political issues, including a corruption scandal in the government which caused the resignation of three ministers and the detention of a few businessmen.

Analysts emphasize that the decision by the Turkish Central Bank was important as it demonstrated the bank’s willingness to solve domestic economic problems and stressed its independence from the government. Previously, the Central Bank was perceived as the organisation susceptible to pressure from the Turkish Prime Minister Recep Tayyip Erdogan who said right prior to the meeting that he was always opposed to any rate increase.

Some of other emerging-market currencies that investors have been anxiously focused on also strengthened subsequent to the interest-rate decision. The South African rand gained 0.8% versus the dollar right after the decision by Turkey’s Central Bank although only one day before it was hitting five-year lows. The Russian ruble also grew slightly.